With tech stocks still reeling from a general selloff, there are many potential value opportunities out there for investors at the moment. One of the most likely winners, in the long run, is Google parent company Alphabet (NASDAQ:GOOGL).
Down by just over 20 percent year-to-date, Google’s parent company has a laundry list of advantages that make it a compelling buy now.
Why Is Alphabet a Buy?
The single biggest bright spot for Alphabet at the moment is the fact that it is still turning in much larger revenues than it was prior to the health crisis.
Q1 revenue totaled $68.0 billion. This was lower than Q4’s impressive peak of $75.3 billion, but still 23 percent higher than Q1 2021.
On the surface, slowing revenue growth may appear to be a negative for the company. However, it’s important to keep context in mind. The extremely high growth rates of the past two years were largely a result of the highly unusual conditions surrounding the pandemic. The current growth rate appears to represent something of a return to pre-pandemic normality.
The critical point with regards to revenue growth is that Alphabet is achieving these growth rates against pandemic-era revenues. In other words, Alphabet has reaped the benefits of the pandemic and can now return to ordinary growth rates from a much higher revenue baseline. Going forward, this should tend to support share prices and allow the stock to continue a steady upward trend.
Alphabet’s exposure to cloud computing is another strong factor in favor of the stock going forward. Revenue from Google Cloud reliably turns in high rates of growth, usually in excess of 40 percent. With cloud computing set to become a gigantic industry in the coming years, this fast-growing part of Alphabet’s business should help its share price to advance long-term.
In addition to its business strengths, Alphabet is also planning a 20-for-1 stock split in July. While this won’t affect the intrinsic value of the company at all, investors can expect to see a price jump following the split as demand for more affordable shares results in higher trading volumes. Historically, companies that split their stocks go on to outperform the market in the year the split occurs.
A final factor to consider with regards to Alphabet stock is its potential upside over the next year. The median 12-month target price from analyst forecasts, however, is $3,290.
If the stock hits this target, it would represent a gain of 42.2 percent. Even the lowest target, representing the most bearish analysis, places Alphabet at $2,840 for a gain of 22.8 percent.
Alphabet Valuation
Alphabet’s P/E ratio of 20.56 is higher than the industry average, but also on the lower end of the stock’s historic P/E range. The company’s price-to-book ratio, however, is a bit more concerning at 6.00.
One outstanding area for Alphabet from a value perspective, however, is its cash flow per share. The industry average for this metric is minuscule while Alphabet produces an exceptional cash flow of $133.85 per share. The company’s cash flow is one of its most appealing factors and largely makes up for some less-than-inspiring valuation metrics elsewhere.
As with revenue growth, context is important when it comes to deciding whether Alphabet is overvalued. The average P/E of the NASDAQ is 21.85, almost exactly in line with Alphabet’s. This suggests that Alphabet is fairly valued relative to the other tech companies in the NASDAQ.
What Are Investors Worried About?
Despite several positive points, there are still some potential pitfalls investors should look out for.
The most pressing of these is the possibility of slipping earnings. In Q1, the company reported an earnings miss of $24.62 against analyst expectations of $25.91. This was the first earnings miss following three quarters of double-digit beats. If earnings continue to slide in future quarters, the stock could trend lower and miss its target range.
Like many large companies, Alphabet has also taken some damage due to the ongoing crisis surrounding Russia’s invasion of Ukraine. The company announced in early March that it would suspend all ad sales in Russia.
Geopolitical uncertainty has also caused a pullback in ad spending among European customers. These factors will certainly remain relevant through at least Q2 and could have lasting impacts throughout 2022.
Alphabet Upside Is Huge Now
Although it may appear to be a mixed bag, Alphabet is an excellent stock to buy at the moment. With its P/E ratio fairly low by the company’s historical standards and ample upside potential over the next 12 months, investors who buy this dip will likely see very strong returns on their investments.
Looking to the long-term horizon, it appears that Alphabet still has ample room left to run. The company’s cloud computing division is growing rapidly in an industry that is primed for a massive expansion in the coming years.
While revenue growth in the company’s core ad business has shifted down from its former highs, it is continuing at about pre-pandemic levels that should be more sustainable going forward. This makes Alphabet a good stock to buy now and hold for the long haul.
When we examined the company’s cash flows, the large upside opportunity was apparent. By forecasting cash flows and discounting them back to present day, the fair market value for Alphabet is $3,115, suggesting upside of 36.9% based on current price levels.
For the last few years, Alphabet has been trading close to its intrinsic value so this dip offers the chance to buy it with a considerable margin of safety. Often these opportunities only present every few years. The challenge of course is a dip could turn into a bear market that offers even better prices. It’s precisely the reason why dollar cost averaging is the preferred way to accumulate top stocks like Alphabet.
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